How Goldcorp Continues To Grow

VANCOUVER– Goldcorp’s (G-T, GG-N) president and CEO, Chuck Jeannes, presented a measured but positive outlook for his company as a keynote speaker at the Mineral Exploration Roundup convention here, taking a bullish stance on gold and emphasizing the need for miners to balance grassroots exploration with replenishing reserves at operating mines.

Jeannes said he was asked to discuss the “challenges in gold” but, since that topic rapidly grew to an unwieldy size, he narrowed his focus to the challenges in achieving and maintaining a solid growth profile as a major mining company.

“Growth is the single most important factor in creating and sustaining value,” Jeannes said. Achieving growth, he continued depends on three factors.

The first is replenishing reserves, especially at operating mines to extend mine lives. One of Jeannes’ main examples here was Goldcorp’s Red Lake mine in Ontario. The world’s richest gold mine, Red Lake produced 620,000 oz. gold in 2009 and is expected to produce 675,000 oz. in 2010. Currently, reserves support another 14 years of operation at Red Lake. But in 2008, Goldcorp acquired Gold Eagle Mines and its nearby Cochenour deposit, which already hosts 5 million oz. gold. Goldcorp is now dewatering a shaft at Cochenour and advancing a lateral drift to provide two access points to the main underground zone for exploration.

“We don’t have a feasibility study for Cochenour yet, but we know it’s a mine,” Jeannes said. Goldcorp also added a new drift out from the current Red Lake workings that allowed drills to probe the deep extensions of the mine’s high-grade zones and the drilling has hit significant mineralization at depth.

Replenishing reserves at active mines is “not as exciting” as grass-roots exploration discoveries, Jeannes conceded, but it is key to the growth profile of a major company. In fact, Goldcorp puts more money into expanding reserves at mines than into early stage exploration.

Regional targets also play an important role, Jeannes said, pointing to the Penasquito area in Mexico as an example. Just by mining and leaching the defined oxide resources at the Noche Buena deposit, discovered as a regional target, and the Camino Rojo deposit, acquired through the ongoing takeover of Canplats Resources (CPQ-V), Goldcorp could add 200,000 oz. of gold production per year to its new Penasquito operation.

The second key growth factor, according to Jeannes, is finding and acquiring new projects. In this arena there are several considerations: getting the right balance between exploration and acquisition; making sure to invest in early stage project-generation opportunities; and aggressively buying projects that fit a company’s growth strategy. The Canplats acquisition, which is not yet closed, is a good example: Goldcorp upped its bid for the junior twice in the face of competing bids in order to get its hands on the company’s well-located project.

“And yes, we’re actively looking for new projects,” Jeannes told the luncheon audience, composed primarily of junior explorers. “So get out there, get drilling, and when you find something give us a call.”

The third growth factor is what Jeannes terms “The Problem” and says it’s something he’s asked about every day. The challenge: how do you prevent Goldcorp from becoming too big to continue growing? Jeannes answer is twofold. First, the company has to actively manage its overall project portfolio, which not only means acquiring new projects but also divesting its non-core assets. By doing that, a company can grow in value, if not always in ounces of production. Second, Jeannes said his company cannot be afraid to add base metals projects to its portfolio. The company already produces lead and zinc, and a mine at El Morro in Chile would be a primary copper producer. Jeannes says base metals have to stay at or below 30% of Goldcorp’s production value, but to that level can be an important contribution.

In a more general sense, he said Goldcorp focuses on four points to achieve sustained growth: maintaining an outstanding balance sheet, keeping production costs low, working in areas of low geopolitical risk, and avoiding hedging. On the last point, he added, “We have never hedged gold and we won’t.”

Goldcorp’s current balance sheet counts as outstanding. The company finished 2009 with $865 million in cash, $862.5 million in senior notes, and an untapped $1.5-billion debt facility at the ready. Over the next five years cash flow from its operations should total $1.5 billion.

Goldcorp’s focus on growth certainly shows in its production projections. The company produced 2.4 million oz. gold in 2009, at an average cash cost of US$295 per oz. (net of by-product credits). By 2014, Jeannes expects production to grow to 3.8 million oz. annually, reaching 5 million oz. by 2017 or 2018.

Penasquito is the most important contributor to that growth profile. Goldcorp is most of the way through building the largest mine in Mexico at Penasquito, which boasts gold reserves of more than 17 million proven and probable ounces. Over its 22-year lifespan the mine’s annual gold production will average 500,000 oz. but during some of the early years, Penasquito will produce as much as 800,000 oz.

And Jeannes did not shy away from the chance to defend his company’s recent actions in the ongoing battle over El Morro. New Gold (NGD-T, NGD-X) recently exercised its right of first refusal to acquire the remaining 70% of El Morro from Xstrata (XTA-L), which had otherwise inked a deal to sell the stake to Barrick Gold (ABX-T, ABX-N). Goldcorp was behind the New Gold move and plans to buy the 70% interest immediately. Shortly after New Gold announced its exercise and plans to sell the stake to Goldcorp, Barrick filed a lawsuit alleging New Gold had acted illegally in the manoeuvre.

“We feel quite confident that everything was done lawfully with respect to New Gold — they had the right to do what they did and they had the right to maximize shareholder value,” said Jeannes. “We’ve got a good case and we’re confident we’ll be building the El Morro project in the near future.”

Barrick and Goldcorp are joint venture partners on several other projects, such as the development- stage Pueblo Viejo gold project in the Dominican Republic. The mine, which is expected to cost $2.7 billion to build, should start producing gold before the end of 2011.

Finally, asked for his view on the gold price, Jeannes took a bullish stance.

“I think a significant change has occurred of late from looking at gold as a commodity to looking at it as an asset class,” he said. Gold’s functions beyond its commodity value — as a hedge against inflation and a bet against the U.S. dollar — “give it upside potential”; in addition, the supply side “continues to look weaker.” As such, Jeannes sees the price of gold reaching US$1,500 per oz. in the next few years.